Essential requirements for refinancing your mortgage

PublishedFeb 24, 2025|Time to read min

Quick insights

Refinancingec-refinance-hl000061 your mortgage can help you lower interest rates, adjust your loan terms or access home equity.
Understanding the requirements to refinance can help position you to get better terms.
Being able to produce the documentation necessary to demonstrate your income, debt and assets is an important part of the refinance process.

Refinancing¹ has several potential benefits, including taking advantage of lower interest rates, changing your loan terms or tapping into your home equity. There are some common requirements lenders will review when you apply to refinance, regardless of which type you’re applying for.

We'll explore these refinance requirements, how they vary by loan type and what your next steps should be to refinance.

When should you refinance?

You’ll almost always owe closing costs when you refinance. It's important to wait to refinance until it benefits you. Here are some common benefits that could make refinancing worth it:

Getting a lower interest rate to lower your monthly payment.
Going from a variable interest rate to a fixed interest rate.
Changing the loan type to get rid of mortgage insurance costs.
Changing the loan length to save on interest or lower your monthly payments.
Accessing your home equity for productive purposes—like debt consolidation, home improvements or buying another property

Basic requirements to refinance a mortgage

There are five critical areas lenders will review when you apply to refinance. The specific thresholds for each area can vary significantly depending on the loan type, the lender and their holistic review of your application.

Credit score

Your credit score will be one of the main factors lenders review for almost any loan you can apply for. Refinancing is no different, regardless if you’re looking to access equity with a cash-out refinance or lower your monthly payment with a rate and term refinance.

Similar to when you applied for the original loan, there are benefits to having a strong credit score beyond just qualifying for the loan. Generally, the stronger your credit score, the more favorable terms lenders can offer. This holds true for refinancing, as well. You’ll need to communicate with your lender directly to determine what score you’ll need to meet their qualifications for a refinance.

Debt-to-income ratio

DTI ratio accomplishes multiple priorities for the lender at once. First, it allows them to get a sense of your earning potential, including proof of income. At the same time, they can also look at your recurring debts to get an understanding of how additional debt will affect you. The specific ratio you need will vary by lender and your application.

Be mindful that refinancing can lead to taking on more debt. This will affect your DTI ratio moving forward, which you need to factor into your financial planning, especially if you’re considering additional financing.

Loan-to-value ratio

The loan-to-value ratio (LTV) allows lenders to assess how much equity you’ve built in the property. Generally, the more equity you have, the less risky a new loan is for them, improving your chances of being approved.

LTV is calculated by dividing the outstanding loan amount by the property’s appraised value or purchase price. (Multiply the results by 100 to convert it into a percentage.) The lower the number, the better the ratio.

LTV and equity are often confused because they describe the same thing but inversely. The more equity you have, the lower your LTV will be and vice versa. The percentages will also add up to 100%. For example, if you have 20% equity, your LTV would be 80%. If you have a 20% LTV, you have 80% equity.

Do you have to have 20% equity to refinance?

Conventional wisdom says you need an LTV of 80% or lower (20% equity) to refinance, but that’s not necessarily true. It’s a fine guideline, but the exact threshold you need will depend on the loan, the lender and your application.

One reason 20% equity is mentioned for refinancing conventional loans is that it’s the threshold at which private mortgage insurance (PMI) can be dropped from the loan, increasing monthly savings.

Appraisal

Lenders use professional home appraisals to determine the fair market value of your home. Think of it as a baseline from which you can work. It’s one of the critical variables in the formula to calculate your LTV, so lenders require them for almost all refinances.

The average home appraisal costs $357.home-appraisal-cost-2024 Some lenders will cover the costs, while others expect the borrower to do so.

Closing costs

Since refinancing means getting a new loan, you’ll usually owe closing costs again. Some lenders might be willing to pay some if they’re running a promotion or allow you to roll them into the loan. Unfortunately, some of the fees you’ll pay again are the same as for the original mortgage, like a title search and an origination fee.

According to Freddie Mac ^®, you can expect to pay 3%–6% of the loan principal in closing costs when refinancing.understanding-costs-freddie-mac

Cash-out refinance requirements

It’s worth noting that cash-out refinance requirements are usually stricter than rate and term refinances. Those refinances aim to take advantage of lower interest rates to either lower your monthly payment or adjust the length of your loan.

Cash-out refinances involve dipping into your equity. That usually means your lender issues you cash, increasing your monthly payment. This results in more risk for your lender, which they offset by thoroughly vetting applicants and setting stringent standards for approval. That said, the final decision on specifics will still come down to your overall application.

What documentation do you need to refinance?

The mortgage documents you’ll need to refinance are the same documents you’ll need for any loan application. They’ll typically include:

W-2s
Bank statements
Tax returns
Pay stubs
Official identification

Keep in mind the required documents can vary depending on your sources of income. If your lender asks for additional supporting documentation, do your best to provide them if possible. Otherwise, you risk delaying the underwriting process.

How soon can you refinance?

The short answer to how soon you can refinance is that it depends. If you want to use the same lender, there’s usually a “cooldown” or “seasoning” period after closing on a loan before you can refinance it. These vary widely by lender but are generally at least six months.

You don’t have to use the same lender that issued the original mortgage when refinancing. However, you may still be limited by the type of loan. For example, if you’re pursuing a Federal Housing Administration (FHA) Streamline Refinance, you must wait at least 210 days from the closing date.streamline-refinance-fdic-2024

Refinancing next steps

If you’re interested in pursuing refinancing, get in touch with a home lending advisor today. They discuss your options and help you find a refinancing loan that suits your situation.

Once you’ve decided on the type of refinancing to apply for, take the time to compare lenders. There’s nothing wrong with reaching out to multiple lenders, and keep in mind you don’t have to use the same lender as your original mortgage. Shopping around could help you find a lower interest rate and save on lender fees.

In summary

Refinancing requirements cover some of the same conditions as your original mortgage application. Unfortunately, it will also require repeating certain steps, like the appraisal and title search, which typically increase your closing costs. Also, make sure you’re getting the benefits of refinancing before committing.

Take the first step and get preapprovedaffordability_hl000008

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